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CHAPTER 1
Strategic Management:
Creating Competitive
Advantages
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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Learning Objectives
1. Define strategic management and its four key attributes.
2. Understand the strategic management process and its three
interrelated and principal activities.
3. Identify the vital role of corporate governance and stakeholder
management as well as how “symbiosis can be achieved
among an organization’s stakeholders.
4. Understand the importance of social responsibility, including
environmental sustainability, and how it can enhance a
corporation’s innovation strategy.
5. Recognize the need for greater empowerment through the
organization.
6. Explain how an awareness of a hierarchy of strategic goals
can help an organization achieve coherence in its strategic
direction.
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The Important of Leadership
Consider …
Maintaining competitive success or even surviving
over long periods of time is difficult for companies of
any size.
SO how much credit (or blame) does a leader
deserve?
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Two Perspectives of Leadership
EXTERNAL CONTROL
PERSPECTIVE
ROMANTIC VIEW
External forces
determine the
organization’s success.
• Economic
downturns.
A leader is the key force
in the organization’s
success.
• Steve Jobs.
© McGraw Hill
Leaders Can Make a Difference
• Be proactive — anticipate change.
• Refine strategies continually.
• Be aware of external opportunities and threats.
• Understand thoroughly the firm’s resources and
capabilities.
• Make strategic management both a process and
a way of thinking throughout the organization.
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Defining Strategic Management
Strategic management involves:
• Analysis.
• Strategic goals (vision, mission, strategic objectives).
• Internal and external environment.
• Decisions — Formulation.
• What industries should we compete in?
• How should we compete in those industries?
• Actions — Implementation of strategy.
• Allocate necessary resources.
• Design the organization to bring intended strategies to
reality.
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Two Fundamental Questions
1. How should we compete in order to create a
competitive advantage in the marketplace?
2. How can we create competitive advantages in
the marketplace that are unique, valuable, and
difficult for rivals to copy or substitute?
Note: Operational effectiveness is not enough to
sustain a competitive advantage.
© McGraw Hill
Strategic Management
Key attributes of strategic management:
• Directs the organization toward overall goals and
objectives.
• Includes multiple stakeholders in decision making.
• Needs to incorporate short-term and long-term
perspectives.
• Recognizes trade-offs between efficiency and
effectiveness.
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Strategic Management Trade-offs
Managers need to be ambidextrous.
• Focus on long-term effectiveness.
• Expand product-market scope by proactively
exploring new opportunities.
• At the same time:
• Focus on short-term efficiency.
• Align resources to take advantage of existing
product markets.
© McGraw Hill
Question 1
According to Henry Mintzberg, the realized
strategies of a firm
A. are a combination of deliberate and emergent
strategies.
B. are a combination of deliberate and
differentiation strategies.
C. must be based on a company’s strategic plan.
D. must be kept confidential for competitive
reasons.
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Intended vs. Realized Strategies. The business
environment is far from predictable.
Intended Strategy
Realized Strategy
• Organizational
decisions are
determined only by
analysis.
• Intended strategies
rarely survive in the
original form.
Decisions are
determined by both
analysis (deliberate) and
unforeseen
environmental
developments,
unanticipated resource
constraints, and/or
changes in managerial
preferences (emergent).
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Strategic Management Process
Exhibit 1.3 The
Strategic
Management
Process.
Access the text alternative for slide images
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Strategy Analysis
1
• Strategy analysis is the starting point in the
strategic management process.
• The analysis needs to be done to effectively
formulate and implement strategies.
• It involves careful analysis of the overarching
goals of the organization.
• It requires a thorough analysis of the
organization’s external and internal environment.
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Strategy Analysis
2
Analyzing organizational goals and objectives.
• Establish a hierarchy of goals.
• Vision.
• Mission.
• Strategic Objectives.
Analyzing organizational goals and objectives.
• Managers must monitor and scan the environment as
well as analyze competitors.
• General environment.
• Industry environment.
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Strategy Analysis
3
Assessing the internal environment of the firm.
• Analyze strengths and relationships among activities that
constitute a firm’s value chain.
• Analysis can uncover potential sources of competitive
advantage.
Assessing a firm’s intellectual assets.
• Knowledge workers and other intellectual assets drive
competitive advantage and wealth creation.
• Networks and relationships plus technology enhance
collaboration, accumulates and stores knowledge.
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Strategy Formulation
1
Based on strategy analysis, strategy formulation
is developed at several levels.
• Business-level strategy: How to compete in a given
business to attain competitive advantage.
• Corporate-level strategy: What businesses to compete in;
how businesses can be managed to achieve synergy.
• International strategy: What strategies are needed as the
business ventures beyond its national boundaries.
• Entrepreneurial initiatives: How can businesses create
new value.
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Strategy Formulation
2
Formulating business-level strategy.
• Successful firms develop bases for sustainable
competitive advantage through:
• Cost leadership and/or:
• Differentiation, as well as:
• Focusing on a narrow or industrywide market segment.
Formulating corporate-level strategy.
• Addresses a firm’s portfolio (or group) of businesses.
• What business or businesses should we compete in?
• How can we manage this portfolio of businesses to
create synergies?
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Strategy Formulation
3
Formulating international strategy.
• What is the appropriate entry strategy?
• How do we go about attaining competitive advantage
in international markets?
Entrepreneurial strategy and competitive
dynamics.
• How do we recognize viable opportunities?
• How do we formulate effective strategies?
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Strategy Implementation
1
Strategy implementation takes action to
implement the formulated strategy.
• Ensure proper strategic control systems.
• Establish an appropriate organizational design,
coordinating and integrating activities within the firm.
• Coordinate activities with suppliers, customers, alliance
partners.
• Leadership ensures organizational commitment to
excellence and ethical behavior.
• Promote learning and continuous improvement.
• Act entrepreneurially in creating new opportunities.
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Strategy Implementation
2
Strategic control and corporate governance.
• Exercise Informational Control.
• Monitor and scan the environment.
• Respond effectively to threats and opportunities.
• Exercise Behavioral Control.
• Proper balance of rewards and incentives.
• Appropriate cultures and boundaries (or
constraints).
• Practice Effective Corporate Governance.
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Strategy Implementation
3
Creating effective organizational designs.
• Organizational structures must be consistent with
strategy.
• Organizational boundaries must be flexible and
permeable.
• Strategic alliances must capitalize on capabilities of
other organizations.
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Strategy Implementation
4
Creating a learning organization and an ethical
organization.
• Effective leaders.
• Set a direction.
• Design the organization.
• Develop an organization committed to excellence
and ethical behavior.
• Create a “learning organization.”
• Benefit from individual and collective talents.
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Strategy Implementation
5
Fostering corporate entrepreneurship.
• Firms must continually improve and grow.
• Firms must find new ways to renew themselves.
• Entrepreneurship and innovation provide for new
opportunities to enhance a firm’s innovative capacity.
© McGraw Hill
Corporate Governance and Stakeholder
Management
Appropriate strategic management requires an
effective and appropriate corporate structure.
Corporate governance is the relationship among
various participants in determining the direction and
performance of corporations.
Primary participants are:
• Shareholders.
• Management (led by the Chief Executive Officer).
• The Board of Directors (BOD).
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Corporate Governance
Board of Directors
Elected representatives of
the owners.
Ensure interests and motives
of management are aligned
with those of the owners.
• Create an effective and
engaged board.
• Address shareholder activism.
• Provide proper managerial
rewards and incentives.
• Establish external control
mechanisms.
Exhibit 1.4 The Key Elements of
Corporate Governance.
Access the text alternative for slide images.
© McGraw Hill
Stakeholder Management
Exhibit 1.5 An Organization’s Key Stakeholders and the
Nature of Their Claims.
Stakeholder Group
Nature of Claim
Stockholders
Dividends, capital appreciation
Employees
Wages, benefits, safe working environment, job
security
Suppliers
Payment on time, assurance of continued relationship
Creditors
Payment of interest, repayment of principal
Customers
Value , warranties
Government
Taxes, compliance with regulations
Community
Good citizenship behavior such as charities,
employment, not polluting the environment
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Two Views of Stakeholder Management
ZERO SUM
SYMBIOSIS
• Stakeholders
compete for attention
and resources.
• The gain of one is a
loss to the other.
• Stakeholders are
dependent upon
each other for
success and wellbeing.
• Stakeholders receive
mutual benefits.
© McGraw Hill
Question 2
P&G created a cleaning product that led to a
change in consumer shopping habits and also a
revolution in industry supply chain economics.
According to the text, this is an example of
A. zero-sum relationship among stakeholders.
B. stakeholder symbiosis.
C. rewarding stakeholders.
D. emphasizing financial returns.
© McGraw Hill
Social Responsibility and Environmental
Sustainability
• Firms have multiple stakeholders and must go
beyond a focus solely on financial results.
• Social responsibility is the expectation that
businesses or individuals will strive to improve
the overall welfare of society.
• Firms can measure a triple bottom line,
assessing financial, social, AND environmental
performance.
• Sustainability projects can yield substantial
benefits even when they are difficult to quantify.
© McGraw Hill
Empowered Strategic Management
Strategic management requires an integrative view
of the organization.
ALL functional areas and activities must fit together
to achieve goals and objectives.
Leaders are needed throughout.
• Local line leaders have profit and loss responsibility.
• Executive leaders champion and guide ideas.
• Internal networkers hold little positional power, but
have conviction and clarity of ideas.
© McGraw Hill
Coherence in Strategic Direction
1
Organizations express priorities best through stated
goals and objectives that form a hierarchy of
goals.
• Vision evokes powerful and compelling mental
images of a shared future.
• Mission encompasses the organization’s current
purpose, basis of competition, and competitive
advantage.
• Strategic objectives operationalize the mission
statement with specific yardsticks.
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Coherence in Strategic Direction2
Exhibit 1.6 A Hierarchy of Goals.
Access the text alternative for slide images
.
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Coherence in Strategic Direction
3
Organizational vision.
• A “massively inspiring” goal, overarching, long term.
• A destination driven by and evoking passion.
• Developed and implemented by leadership.
• A fundamental statement of an organization’s values,
aspirations, and goals.
• Captures both the minds and hearts of employees.
• BUT can backfire and erode a company’s credibility.
© McGraw Hill
Coherence in Strategic Direction
4
Mission statement.
• Encompasses both the purpose of the company and
the basis of competition and competitive advantage.
• More specific than the vision.
• Focuses on the means by which the firm will compete.
• Incorporates stakeholder management.
• Communicates why an organization is special and
different.
• Can and should change when competitive conditions
change.
© McGraw Hill
Coherence in Strategic Direction
5
Strategic objectives.
• Used to operationalize the mission statement.
• Provide guidance on how to fulfill mission and vision.
• Measurable, specific, appropriate, realistic and timely.
• Channel all employees’ efforts toward common goals.
• Can be both financial and nonfinancial.
• Should be challenging, yet help resolve conflicts.
• Provide a yardstick for rewards and incentives.
• BUT too many objectives can result in lack of focus.
© McGraw Hill
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